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Open Banking—Are You Ready?

Financial Technology

Financial companies are beginning to adopt open banking, an approach that allows financial
institutions to share customer data with other connected systems. Christian Ball of
GFT analyzes the emerging trend and discusses how companies can fully realize the
benefits of the technology.

By Christian Ball

Christian Ball is the head of retail finance services at specialist banking and IT
consultancy GFT, having joined from Meniga, a fintech company in Europe.

Open banking is an emerging technology trend among forward-thinking banks that use
an application programming interface (API) ecosystem to help them innovate products
and devise new customer engagement strategies. Adopting this approach allows banks
to better provide more personalized customer offers and other account information
services so they can remain competitive in a rapidly evolving and increasingly agile
market. Non-banking entrants such as tech giants and fintech companies are already
making inroads and attracting new customers. There will likely be a shake up of the
financial services industry in 2018 as established banks adapt their services to compete
and go head-to-head with new entrants.

Creating an open API ecosystem allows financial institutions to share their customer
data with other secure connected systems, using a set of clearly defined methods of
communication between various software components. Customers are in control of the
data that is shared, enabling them to benefit from new added value services that utilize
their individual financial information.

Open banking is a fairly new concept, so there isn’t yet a great deal of historical
knowledge for companies to draw on to make it an easy process to adopt. One place
to look to for experience is the European banking market.

In Europe the move towards open banking is being led by a desire to innovate, but
most urgently by a regulation known as the second
Payments Service Directive (PSD2). Banks are required under PSD2 to comply with certain technical standards for new
payment methods and innovations, such as the use of virtual currencies. PSD2 imposes
a compliance deadline of Jan. 13.

This deadline has been forcing banks throughout 2017 to change their systems to create
a more competitive landscape and provide consumers with a more extensive and cost-effective
array of financial services and products. Given this legal imperative in Europe, banks
in other countries that trade in Europe will also need to become compliant. And for
those that don’t, reviewing the experience of those affected will help them determine
best practices for implementing the technology.

Data Driven Insights

One of the fundamental changes with open banking is the focus on extracting the maximum
value from customer data that was previously processed and stored, but not analyzed.
The focus is now on greater analysis and use of customized customer data to provide
tailored products, services, and guidance. The desire for customized guidance is evident
in recent GFT research that found more than half (55 percent) of consumers feel comfortable
with a bank monitoring their spending habits if it is then able to improve their disposable
income through personalized offers, money saving tips, real-time reminders, and updates.

Banks are sitting on a goldmine of interesting and useful customer data, and with
the aid of new technologies, it should become easier for them to analyze and use this
data more effectively; in so doing provide a benefit for both the customer and the
bank. Using transaction metadata gained from a smart transaction manager and personal
financial management (PFM) tools, customers can aggregate their financial data from
multiple financial institutions. Banks can benefit by improving the services they
deliver to customer segments, providing individually tailored services that are personalized
for each customer. Banks should also consider data from alternative sources such as
social media to combine with their own data. Such data could prove invaluable to banks
and could potentially be used as a means of streamlining account opening, providing
background data for a loan application, or simply as a means to further improve the
overall customer experience.

Banks will realize benefits from their data if they are able to build a detailed and
accurate picture of their customers, since this will tell them which products and
services are most appropriate to offer to each individual. 2018 is likely to be all
about working with “fast data”—quickly gathering, assessing, and overlaying data from
different internal and external web-based sources in real time. By automating the
process, it will guarantee quality and consistency, as well as delivering significant
scalability and capability benefits over manual data gathering, checking, and cross-checking.

New Models to Provide Alternative Services

Faced with increased competition, banks need to ensure they offer new and attractive
types of services to their customers so that they don’t stray elsewhere. To do this,
banks should consider moving to a “Bank-as-a-Platform” (BaaP) model. This is where
banks move away from an environment that requires them to own all of the technology
in which they transact their business. Under the BaaP model, banks can service customers
by using a combination of their own technology and third-party solutions. For example,
banks can use third-party money transfer services to conduct international financial
payments, rather than having to build and maintain the infrastructure to conduct the
task themselves.

Through a platform model, banks can provide their customers with all of the services
they might want without having to bear the associated costs. But more importantly,
they can use the time and budget that would otherwise have been deployed to focus
on enhancing their customer service even further.

A recent GFT banking expert survey found that one third (33 percent) of banks have
a BaaP strategy in design or implemented already, while 17 percent have a plan that
has yet to be implemented. This is a promising start, but if retail banks are to truly
service their customers’ needs, all players in the market will need to have a strategy
underway in 2018 so they don’t risk losing customers to more agile financial service
providers.

Cultural Shifts

Regulatory drivers and the move to BaaP are pushing the financial services industry
towards the open banking model. However, aside from technology and platform changes,
banks need to analyze their current operation to embrace the new opportunities. This
may be to support an evolved bank brand or new ecosystem marketplaces, or to drive
the monetization of APIs as products.

Open banking is new and therefore requires a new way of thinking, new ways of working
and an evolved organization that is both technically
and business enabled. Teams within the bank are required to evolve—becoming a hybrid combination
of skills and people that are more agile in how they work together. This hybrid approach
is one which will cut across the more traditional financial services methodology in
terms of its siloed organizational structure. Organizations will increasingly need
to think about the product, the customer, the elements of the API as a product, and
how they can be assembled in various ways to drive value. To do this, technologists
and business heads need to come together and collaborate, and it is this collaborative
experience that is so important for financial services to get right.

The Legal Imperative for Collaboration

In Europe, the Jan. 13 deadline will create a dramatic shake-up of the European payments
market. PSD2, for the first time, compels the banking industry to give a potential
competitor access to their customer’s data. This open banking environment provides
an optimum opportunity for change and collaboration.

The key to open banking is data sharing, and this is particularly crucial within the
organization, be it a bank or a fintech firm. For PSD2, legal, compliance and data
protection teams will no doubt have been very busy analyzing the impacts of the new
regime, and organizations should ensure that teams are aligned in their approach to
implementation. For others toying with the open banking approach outside of Europe,
the focus on monetizing the value in large amounts of customer data will raise similar
issues that will need to be overcome.

Legal and compliance teams looking to adopt the open banking approach should:

ensure the regulatory permissions they already have in place or are applying for
cover all of the activities they undertake;

amend existing documentation and implement new systems and processes to ensure compliance
with the new regime, and ensure that any changes work smoothly from an operational
perspective;

review existing policies to ensure they adequately protect payment service users
against industry specific risks, such as fraud and the illegal use of sensitive and
personal data; and

regularly test and review these procedures and have processes in place to file, monitor,
track and restrict access to sensitive payment data.

With vast amounts of customer data being used, from a data protection perspective
the PSD2 regulation aims to bolster consumer protection by ensuring that personal
data is handled safely and securely. Data protection teams need to work closely with
legal departments, particularly on the legal requirements when handling personal data
and obtaining consumer consent.

Building new services is costly and time consuming. Open banking encourages the collaboration
and innovation that the banking industry needs, but in an increasingly competitive
arena. Banks and fintech companies need to strike a balance between taking advantage
of the opportunities presented by open banking while complying with all regulatory
requirements and cybersecurity legislation.

Conclusion

If there is one thing in 2018 on which retail banks must focus, it is to be entrepreneurial.
Banks have previously been entrepreneurial in some ways within the confines of their
own product innovation. Now they need to apply similar levels of entrepreneurship
to their go-to-market strategy by reinventing and improving structures. Only then
can they really be ready to embrace the open banking revolution.

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